AAPL: BTIG Ups to Buy on Low-Cost iPhone Prospects

By Tiernan Ray

Shares of Apple (AAPL) are higher by $4.40, or 1%, at $432.75, after the stock got an upgrade from BTIG Research’s Walter Piecyk to Buy from Neutral, with a $540 price target, based mostly on the prospect the company will have a lower-cost iPhone by the end of this year, which could add $11 billion in revenue in fiscal 2014 ending September of that year.

Piecyk, who cut the stock to Neutral in April of last year, arguing at the time for a “breather,” now thinks investors need similarly to take a breather from negative sentiment:

While our cautionary Apple thesis over the past year has evolved to include the impacts of a compressed product cycle, our downgrade recommended that “investors should take a breather during the expected strength of the quarter and the rapid rise in the stock and take a moment to consider” – post-paid subsidies, the market for $600 phones and heightened Apple TV expectations. Many of those risks were discounted in the stock while new ones emerged making it hard for investors to focus on potential positive but uncertain opportunities. With today’s upgrade, we once again believe that investors need to take a deep breath during the rapid drop in the stock and leading into what could be a difficult quarterly to take a moment to consider: the various and significant revenue and product opportunities available to the company; the lapsing of the tighter upgrade polices in the United States, its most important market, and the investment opportunities of $150 billion of cash.

Piecyk lays out his back-of-the-envelope for how a cheaper iPhone would reduce average selling prices and margins for Apple while adding to top-line growth:

We forecast a low-priced iPhone will contribute $11 billion to Fiscal 2014 revenue, excluding the impact of cannibalization on the legacy product. This implies 37.5 million phones sold at an ASP of $300 in Fiscal 2014. We also assume that this product’s gross margin is 1500 basis points below the legacy iPhone products. This is the primary contributor to our expectation of a 200 basis point contraction in the consolidated gross margin in Fiscal 2014 to 36.5%. We expect growth in the legacy iPhone revenue to slow to 3% in 2014 from 14% in Fiscal 2013 largely from the cannibalization of the lower-priced product but also from lower ASP assumptions. We expect less than 6% unit growth of high-end iPhones to 152.5 million phones in 2014 sold at an ASP that we expect to dip below $600 over the course of that year. So on a combined basis we expect iPhone revenue to grow over 15% on 190 million units (152 high-end + 38 cheap) representing over 30% unit growth and a blended ASP under $550.

Piecyk was on CNBC later in the morning, being interviewed by Melissa Lee. When pressed as to why investors should jump in just ahead of what may be a gloomy June-quarter outlook, when Apple reports in April, Piecyk characterized the situation as the risk of missing things that could lift the stock nevertheless:

You’ve seen a ton of cuts [to estimates], there’s been $10 taken off the fiscal 2013 estimate [for profit]. More recently, you’ve seen downgrades and incremental cuts. Where is the buy side? There’s a lot of people who are clearly fearful of this june guide. But if you buy on the June guide, but maybe the downside is limited as well. I don’t really understand why consensus is so high for June. It’s been pretty clear that the compressed product cycle is leading to seasonal declines. So the revenue estimate shouldn’t be north of $40 billion. The buy side gets this, I think if the sell side brings their numbers down a bit, then the buy side can get that out of the way. You can risk it and say, I don’t want to own anything. The risk is that Apple comes out with a large announcement with their cash in a couple weeks, that maybe the Samsung announcement tonight turns out not to be so great, that they do end up making some kind of product announcement in June. By not owning the sock, you’re taking risk despite this difficult June quarter, that there’s not going to be other announcements to drive it higher. The Street went from thinking Tim Cook has to provide some revolutionary product to now thinking he won’t even do the obvious things. I think it’s logical they will. And frankly, if they don’t, then you’re probably looking at a different management team in 2014 […] What the market opportunity for Apple is, is, the 70% of the global [mobile phone] subscriber base that doesn’t get subsidized. There’s a huge opportunity for Apple in india, in Thailand, and elsewhere, that is huge incremental revenue opportunity. The low-end phone will be lower by 1500 basis points, but will only bring down corporate gross margin by 200 to 300 basis points. And then, with the money that Apple can invest … There are other things that Apple can benefit from, by people staring at their products with the most up-to-date software version.

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There are 9 comments

MARCH 14, 2013 12:19 P.M.

Lmvcm wrote:

higher for that and China mobile's new !

MARCH 14, 2013 12:37 P.M.

SCOOCH ELLIOTT wrote:

AAPL HAS BEEN OVERSOLD! INVESTORS SHOULD BUY BACK IN. YOU KNOW THEY ARE GOING TO INCREASE DIVIDEND, INCREASE SHARE BUYBACKS, INCREASE THE NUMBER OF IPHONE MODELS...PROBABLY 2 LOWER-COST IPHONE'S TO REGAIN MARKET SHARE, AND INTRODUCE MAYBE A TV AND AN IWATCH. PLUS THE IPHONE3,4 AND 4'S BUYERS ARE ALL DUE FOR AN IPHONE 5 OR 5'S UPGRADE. BUY THE STOCK NOW

MARCH 14, 2013 12:38 P.M.

Ed wrote:

Another a hole heard from

MARCH 14, 2013 12:38 P.M.

Anonymous wrote:

AAPL HAS BEEN OVERSOLD! INVESTORS SHOULD BUY BACK IN. YOU KNOW THEY ARE GOING TO INCREASE DIVIDEND, INCREASE SHARE BUYBACKS, INCREASE THE NUMBER OF IPHONE MODELS...PROBABLY 2 LOWER-COST IPHONE'S TO REGAIN MARKET SHARE, AND INTRODUCE MAYBE A TV AND AN IWATCH. PLUS THE IPHONE3,4 AND 4'S BUYERS ARE ALL DUE FOR AN IPHONE 5 OR 5'S UPGRADE. BUY THE STOCK NOW

MARCH 14, 2013 12:48 P.M.

skier wrote:

iWatch will bring apple back. no one gets it yet. it will replace your wallet, your keys and your phone. imagine all you have to do in the morning is slap it on your wrist and youre good to go. It will lock your house, start your car, pay for your coffee, hold your id, drivers license, passport and medical records, let you into your office, log you onto your computer all wirelessly through NCF, wifi and bluetooth, with siri there to help you pay bills and do searches. it will be revolutionary.

MARCH 14, 2013 1:28 P.M.

palanx wrote:

Nothing but gobbledygook from Piecyk the clown, who slashes price target, expects at least two more earnings misses, and yet upgrades rating.on the account of cheapo iPhone which will destroy margins and earnings. What rubbish!

Appletards love to make excuses for Cook the screwed-up and blame analysts for AAPL free-fall. They constantly whine and scream for investigations of Wall Street and analysts. I agree with them for once that there should be serious investigations into shady dealings between Apple and its crooked analysts like Piecyk and his ilk who slash estimates, price targets, margins, and earnings while maintaining or upgrading ratings.

Stock manipulation can’t get any more blatant than that. Cook the crook and his gang of Wall Street charlatans should be behind bars.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.